1. BUSINESS MODELS FOR HI-
TECH PRODUCTS (MT 5016):
WHAT IS A BUSINESS MODEL?
A/Prof Jeffrey Funk
Division of Engineering and Technology
Management
National University of Singapore
3. Lots of Questions
Which ones will succeed?
Which ones will fail?
How can we increase the chances of
success?
How can we increase the chances of OUR
success?
How can OUR firm succeed to the extent that
OUR firm is in the top 100 market
capitalization
Google, Facebook, Tencent were founded in the
last 15 years
4. New Product Success is not about
Following Rules
It is about SETTING the rules in the new industry!
Setting the rules means BREAKING the existing
rules
What should the new rules be for the new
industry?
How should new rules be different from old rules?
This is completely different from science and
engineering modules!
Science and engineering modules tell you about the
rules of science
5. The Concept of a Business
Model
Can Help Us
Position Our Products Against
other products and other firms
other technologies including the old one
for which customers?
Find and obtain revenues
Position our product in overall value chains
Think about future entrants and long-term
profitability
6. Module Objectives
To understand
business models
their impact on competition between firms
how different business models are needed for
different situations
what drives need for change in business models
Similarities/differences between business models and
strategies
To develop a business model for a firm and
technology in a group project
7. Outline: Elements of a Business Model
Customer selection: whom to serve and not serve
Value proposition: what to offer and how to
differentiate
Value capture: what are dominant sources of revenues
Scope of activities: what activities to carry out and
what relationships to have
Strategic control: how to sustain profitability, create
barrier to entry
Source: Stephen Bradley’s “Capturing the Value,” HBS Video
8. Breaking the Rules
Customer selection: find new customers who are
unsatisfied or find new needs that are unfilled
Value proposition: offer new forms of value
Value capture: find new sources of revenues that
are different from ones in the past
Scope of activities: participate in a different set
of activities than firms have done in the past
Strategic control: create a new barrier to entry
that is different from the ones in the past
9. Outline: Elements of a Business Model
Customer selection: whom to serve and not serve
Value proposition: what to offer and how to
differentiate
Value capture: what are dominant sources of revenues
Scope of activities: what activities to carry out and
what relationships to have
Strategic control: how to sustain profitability, create
barrier to entry
10. Customer Selection
Who are the potential customers?
What are the customer needs and wants?
Do different customers want different things?
How can we use this information to segment the
market (see following slides)?
Are there collaborators who can also be thought of
as customers (see following slides)?
Which customers will probably be the first
adopters of a new technology?
11. What is a
Need?
Understand needs from
perspective of:
Economic – what are
the costs and benefits?
Functional – what does
a product do?
Psychological value –
how do I feel and what
makes me feel better?
12. What is a Need?
Today’s
Business
Customer Needs
Unarticulated
Articulated
Customer Types
Served Unserved
13. Segmentation and Targeting
Categorize customers in groups with distinct
needs
Understand the differences between product and
market segments
Select segment (s) that have the best short
and long-term prospects for the firm
If a new technology,
they must be early
adopters of new technology
Many ways to
segment markets
14. What About Collaborators?
Many products have multiple customers or
collaborators who might be considered
customers
Who are they?
They might be
retail outlets
providers of complementary
products or complementary
services
How does the business model fit with these
collaborators?
15. Outline: Elements of a Business Model
Customer selection: whom to serve and not serve
Value proposition: what to offer and how to
differentiate
Value capture: what are dominant sources of revenues
Scope of activities: what activities to carry out and
what relationships to have
Strategic control: how to sustain profitability
Source: Stephen Bradley’s “Capturing the Value,” HBS Video
16. Value Proposition
Value to
the
target
market
Benefits to
the
target
market
Price to
the
target
market
= Relative
to
A simple and clear statement of the intended target market, the
benefits of the offering, and the price
New technologies/products diffuse because they offer a
superior value proposition to users
But you must provide more details than just a simple and clear
statement!!
17. Value Proposition
What constitutes a good value proposition?
Speed, resolution, efficiency, energy usage?
Features, aesthetics, convenience, happiness, humor?
Usability, compatibility, reliability, durability?
Easier said than done! Don’t follow the old rules!
Rethink your assumptions and market assumptions!
Value Proposition closely related to customer selection
Different value propositions are appropriate for different
customers
In a search for a good value proposition, one must consider
different value propositions along with different customers
18. For Your Group Presentation (1)
Choose a new technology that has recently been
introduced or will soon be introduced
Don’t look too far into the future
Choose an existing firm that might or should introduce
the technology because the technology is consistent
with the firm’s core competencies
19. For Your Group Presentation (2)
Defining a value proposition should help you segment
and target markets
Some segments will adopt a new technology faster
than will other segments
You must identify and target those segments
Ideally you will know the order in which segments/users
adopt the new technology
Then you must contrast your firm’s product or service
with the competitors’ product or service for the target
segment(s)
20. Justification and Quantitative Data
You must justify and/or quantify your data
The justification is more important than the data
Make sure you consider all the important dimensions
Finding a new dimension is often a major source of
advantage in the market
All dimensions aren’t created equally
Quantifying each dimension of performance is useful,
albeit sometimes difficult
22. Outline: Elements of a Business Model
Customer selection: whom to serve and not serve
Value proposition: what to offer and how to
differentiate
Value capture: what are dominant sources of revenues
Scope of activities: what activities to carry out and
what relationships to have
Strategic control: how to sustain profitability
Source: Stephen Bradley’s “Capturing the Value,” HBS Video
24. Old Manufacturing Uber Apple
Microsoft’s Windows YouTube, Google
Facebook
IBM Linux Code Linux Kernel
Wikipedia
Blogs
In-house Community-Driven
Value Creation
ValueCapture
Eco-systemCompany
Collaborators Create an Increasingly Large % of
Value and Providers Expect Smaller % of Value
Source: Chesbrough
and Appleyard, 2007
25. Types of Value Capture in Business Models
Revenue Model Basic Idea
Commission Fees levied on transactions where fees are
based on level of transaction
Advertising End users subsidized by advertising
Markup Value added in sales
Production Value added in production
Referral Fees for referring customers to a business
Subscription Fees for unlimited use
Fee for Service Fee for metered service
26. Large Changes for Revenue Models
in Many Industries
Sources of value capture are changing in many
industries including manufacturing industries
As with other elements of business models, you can’t
just summarize the dominant source of revenues, you
need to
Find and analyze other methods
Justify your choice
Creativity is an important part of a group presentation’s
grade! Propose and analyze a new method of value
capture
27. Outline: Elements of a Business Model
Customer selection: whom to serve and not serve
Value proposition: what to offer and how to
differentiate
Value capture: what are dominant sources of revenues
Scope of activities: what activities to carry out and
what relationships to have
Strategic control: how to sustain profitability
Source: Stephen Bradley’s “Capturing the Value,” HBS Video
28. Scope of Activities
What do you make or do versus what do you
buy or outsource?
Partly a cost decision, partly a strategic decision
Want to reduce costs
But also
want to develop capabilities
don’t want to become dependent on a single firm for a
key component
Thus, make versus buy decisions determine the
areas in which a firm intends to compete
But more importantly……..
29. Vertical Disintegration in Value Chains
has been Emerging Over time
Represents the extent to which work is shared
among different organizations in an industry value
chain
Changes in vertical (dis)integration can come from
technological, institutional, or social changes that
impact on how organizations divide up work
In particular, reductions in transaction cost can
reduce
costs of having work done by multiple firms
importance of integrative capabilities
and thus facilitate the emergence of vertical disintegration
31. Another Reason for Thinking About Scope of Activities:
Identify the flows of information,
money, and products in system
32. Outline: Elements of a Business Model
Customer selection: whom to serve and not serve
Value proposition: what to offer and how to
differentiate
Value capture: what are dominant sources of revenues
Scope of activities: what activities to carry out and
what relationships to have
Strategic control: how to sustain profitability
Source: Stephen Bradley’s “Capturing the Value,” HBS Video
33. Strategic Control
What enables a firm to be profitable with a new technology?
First mover advantages? Good design? Good performance?
These are only important in the short run, In the long-run,
most things can be copied
Why are Google, Facebook, Tencent, Microsoft and Apple so
profitable and for many years? This is what drives venture
capitalists!
This is the most difficult part of a business model
For your group presentations, you should think about this last,
after you have determined the other elements of the business
model
34. Barriers to Entry Determine Profitability
As firms enter, prices typically fall to a level at which
“marginal prices equal marginal revenues” where
Profits barely support business
So creating barriers to entry is critical for achieving
having above average profits. How can this be done?
Control key resource, Intellectual Property (IP), etc.
Might control key resource or asset through economies of scale
Control the way work is divided up among different
organizations (e.g., through control of interface standards)
Network effects
Venture capitalists look for potential barriers to entry,
not just good value propositions!
35. In Summary: For your group presentations
Tell me about the business model
Customer selection: whom to serve and not serve
Value proposition: what to offer and how to differentiate
Value capture: dominant source of revenues
Scope of activities: what activities to carry out
Strategic control: how to sustain profitability
You must justify your choices!
Start forming your groups (3 to 4 members) at the break (in
about 45 minutes)
Consistency
among elements is critical
between business model and company capabilities
Editor's Notes
A Biz Model is like poker or mah jong. Easy to describe, hard to do?
What does he mean by physiological?
Economic, functional, psychological. Everybody is different and things are always changing. The rules change. Don’t force your values on others.
It used to be that military first, companies second, consumers third, but not anymore
What do people want?
What about demand-based economy? Why do I say old manufacturing? Apple? What about big data?
Ask for examples
How to determine profitability of business and thus the choice to enter a market?